Thinking of cashing out an IRA early, tell me if I am stupid or not...

Discussion in 'Community Discussion' started by Khalanad75, Feb 16, 2016.

  1. Khalanad75 macrumors 6502

    Khalanad75

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    land of confusion
    #1
    So here it is in a nutshell,

    My wife has an Rollover Ira from a past jobs 401k. It's currently around $108,000 In the past 6 years it has only gained around 8k with the markets being what they are(was up around 16k at one point though).

    If we were to cash it out, we would be able to pay off all of our debt, except for our mortgages. If we were debt free, we could then start stashing around 30k a year into savings.

    I work for the state and am building a pension, and she is working at another job already maxing out into another 401k, so this isn't our only retirement fund. We still have 17-18 more years till retirement.

    My thinking is a loss now would end up making up for itself over time. In 18 years if we were stash the money and not touch it at all, we would have $540, 000 just form deposits, not counting any interest. With the market the way it is, and the history of this IRA, I don't ever seeing it equal that amount of money.

    So tell me, is this just a completly idiotic idea and should I quit thinking about it?
     
  2. AlliFlowers Contributor

    AlliFlowers

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    #2
    As long as you're that far from retirement - go for it! Just make sure you put away as much as possible once you've got all those bills paid.
     
  3. chown33 macrumors 604

    Joined:
    Aug 9, 2009
    #3
    You should talk to a financial advisor or an accountant. They will be able to advise you of the costs (taxes, penalties), and the growth potential and risks.

    To me, the "completely idiotic idea" is only getting advice from random strangers on an internet forum, rather than talking to a professional.
     
  4. oneMadRssn macrumors 68040

    oneMadRssn

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    #4
    I think you should be able to set up a simple excel spreadsheet to weigh the options.

    What percent interest is your debt? Is it fixed or adjustable? Sure the markets right now aren't great, but maybe you can wait until the next upswing and then move your IRA fund to something safer. Play around with expected percent growths and the probability of getting that growth. Find the break-even point - at what percent expected grown of the IRA does it no longer make sense to cash it out? What do you think the probability is of achieving that growth?

    Looking at it simply, if your loan interest is less than the expected growth of the IRA, then I would leave the IRA and pay the loans from income. If the loan interest is higher than the expected growth of the IRA, taking into account penalties for early withdrawal, then go for it.

    Looking at it with more complexity, take into account the fact that prime interest rates are going up, so all adjustable loans are likely to be adjusted higher soon, but also savings rates should also start ticking up soon.

    Whenever I have questions like this, I spend a few hours making a big excel sheet and playing around with the numbers. Usually at the end of the exercise, I definitively convince myself one way or the other and feel good that I have the math to back up my decision.
     
  5. kch50428 macrumors 6502

    kch50428

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    #5
    Learn your tax consequences first... not only is the cash-out subject to regular tax is income, there's the bit of the penalty tax for cashing out early... you may be better off rolling those old accounts into your current one(s).
     
  6. rhett7660 macrumors G4

    rhett7660

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    #6
    I would not, but that is just me. If you are only gaining "X" amount, I would take a look at what you are investing in. This isn't a result of just having an IRA, but more of what you are investing in. You can make money in a down stock market.

    Are you handling it, or do you have someone else handling this for you? If someone else is doing it, I would take a closer look at what they are doing. If you are handling it, look into getting someone else to handle it for you.

    This is just me of course, if you have 17-18 more years left, and you are already at 108K, you could see that number reach a million by the time you retire with a steady flow of funds being added each month.

    Not to mention the tax hit you may endure by taking out the funds.

    Maybe look at something of cutting your expenses, cutting the amount you invest in half and use the other half to pay down your bills.
     
  7. Tomorrow macrumors 604

    Tomorrow

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    #7
    Full disclosure - I'm not a financial adviser.

    You say you could save $540k in 18 years, that's $30k a year. I read that to mean you have $30k each year of discretionary income.

    You say your 401(k) is currently worth around $108k. If you were to cash it out, you'd be left with just about half that, or $54k, after taxes and penalties - or just around 2 years' worth of discretionary income.

    My point being, why cash it out? Why not just put that $30k/year into paying off your debts, instead of taking a HUGE loss on a major asset?
     
  8. ucfgrad93 macrumors P6

    ucfgrad93

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    Colorado
    #8
    If you cash out, it will be reported as regular income and you will have to pay a 10% penalty which is $10,800 dollars. If you are maxing out your state retirement and your wife is maxing out her job's 401(k), I would recommend the following:

    1. I would stop all contributions to the one you were going to cash out.
    2. Make sure you have $1,000 in an emergency fund.
    3. Make sure you have 3 months of living expenses set aside.
    4. Pay off debt. Start with the lowest balance.
     
  9. arn macrumors god

    arn

    Staff Member

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    #9
    You can do the math but it's hard to see that being the better way to go.

    1. What's your interest rate on your debt?
    2. Why won't you pay off your debt in 3-4 years at this current rate of saving ($30k)?

    arn
     
  10. rdowns macrumors Penryn

    rdowns

    Joined:
    Jul 11, 2003
    #10
    DON'T cash it out. If you have $30,000 a year to sock away, then pay your bills with that money. Why would you want to incur taxes and penalties on an early IRA withdrawal.

    You should also look into moving the IRA elsewhere if you're not happy with the returns.
     
  11. puma1552 macrumors 601

    Joined:
    Nov 20, 2008
    #11
    Isn't the penalty only subject to the earnings, and not the contributions? AFAIK (at least with a Roth, a traditional may be different), I think you can always withdraw contributions penalty free and only pay a penalty on the capital gains.

    But as someone else said, if you have less than $100k in debt and cashing this out and paying all that off would allow you to save $30k a year, why not just aggressively pay down the debt over the next 5-6 years while keeping the IRA? Yeah you won't be debt free today, but you'll have an extra $100k compounding for the next 20 years you otherwise wouldn't, at the short term penalty of not being able to put away a full $30k for the next few years as you pay down the debt.

    It sounds like you are in a strong enough cash position to aggressively pay down the debt while keeping the IRA. I would probably look into changing the funds within and seeing if you can get better performance out of it.
     
  12. oneMadRssn macrumors 68040

    oneMadRssn

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    #12
    While starting with the lowest balance feels good, starting with the highest interest rate is better strategy.
     
  13. ucfgrad93 macrumors P6

    ucfgrad93

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    #13
    I agree with Dave Ramsey

     
  14. oneMadRssn macrumors 68040

    oneMadRssn

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    #14
    You can look up tons of discussions and articles online comparing and contrasting the benefits of Snowball Method (what you quoted, smallest debt first) and Avalanche Method (what I suggested, highest interest first). Plenty of people feel strongly one way or the other. There are even excel templates that let you list your debts and calculate the difference. This is the one I use, and it's very good: http://www.vertex42.com/Calculators/debt-reduction-calculator.html

    However, everyone agrees (including in your Dave Ramsey quote) that the snowball method is all about seeing progress and feeling good and getting motivated with the plan, but the downsides are that it ends up costing more in the long term. With avalanche, typically it can take months or years to see any progress, but in the end, the avalanche method is the most cost-effective way to manage debt. Following the avalanche method guarantees the lowest-possible amount of total interest paid. Following the snowball method guarantees only that you will see progress sooner. For those that aren't financially literate, and need "good feelings" for them to stick with a plan, snowball method is perfect because a plan is only good if you stick with it. For those that don't need instant gratification and can see the math works out long-term and don't need extra motivation to stick with the plan, the avalanche method is perfect.

    For my student loan debts and my budgeted monthly payments towards them, there is about a $3k difference over 5 years between the snowball method and the avalanche method. $3k is no joke, I don't need to see immediate progress when I see that I'll save $3k in the long term.
     
  15. Khalanad75 thread starter macrumors 6502

    Khalanad75

    Joined:
    Jul 8, 2015
    Location:
    land of confusion
    #15

    The 30k a year to stash comes if our debt was paid off.

    The account is being handled by someone and he is known to be one of the top guys in the area (just having some rough years.)

    We are not contributing any extra funds to that account (we probably should be).

    I am just thinking of the feeling of being debt free and being able to pay cash for everything tops the penalty.
     
  16. GoCubsGo macrumors Nehalem

    GoCubsGo

    Joined:
    Feb 19, 2005
    #16
    Before you go cashing out an IRA, spend some dollars on a financial advisor. I had a moment where I questioned whether I should do something that resulted in huge penalties, like withdrawing from my IRA, and realized it was a bad idea. The first step I took is what others described here and that was to list my debt in order from largest to smallest then the other list was highest interest rate to lowest. Basically, paying off my debt using discretionary income was a much better idea that withdrawing or cashing out something that would result in penalties and lost cash. There is some good advice here, but the best advice comes from someone who you can entrust with a lot of information about you and your wife for the best picture of your financial health.

    There is also another thought to keep in mind. If you are debt free, are you certain you can remain debt free? It is like the issue people may have when they make more money. If you once made $50k a year and now you make $100k, you may have thought to yourself that you could pay off all of your debt and live debt free. Instead, you took on more burden because you could afford to, putting yourself further into debt. It's a real issue for some.
     
  17. chown33 macrumors 604

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    Aug 9, 2009
    #17
    There's also the flip side of that: decreased income. If you go from $50k to $30k, for some reason, can you withstand that? For how long?

    Very few people expect to be laid off. As a freelance contract developor, one thing I learned early on (the hard way) was to plan for periods of drought. If I hadn't done that, I would have been screwed the first time I had a 6-month dry spell.
     
  18. nburwell macrumors 68040

    nburwell

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    PHL
    #18
    As the others mentioned, definitely look into what that would mean for your taxes. Friends of mine cashed out their wife's IRA to pay off some debts and they needed a new car. When they did their taxes this year, they found out because they cashed out her IRA account, it bumped them up a tax bracket. So definitely explore your options, talk to a Financial Advisor if need be, and make an educated decision from there.
     
  19. mrkramer macrumors 603

    mrkramer

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    #19
    Do you have some rich relative that will give you that on the condition that you have no debt? Why not take that $30k a year and use it to pay off your debts in two or three years instead of getting all of the penalties associated with cashing out the IRA?
     
  20. sdilley14 macrumors 65816

    Joined:
    Feb 8, 2007
    Location:
    Mesa, AZ
    #20
    Seems like a generally terrible idea to pull out the money now. You essentially "bought high" and would now be "selling low" as far as the performance of the IRA. Don't make a short sighted decision because of what the markets have done in the last few years. Those that had a bunch of money in retirement accounts per-recession and pulled out their money because of the losses they were suffering...the vast majority of those people, if they just would have ridden out the storm, would have made back all of their losses and then some. Moral of the story - don't sell low. And there are also the negative tax implications and penalties. I'm not sure how much debt you have aside from your mortgages...but my guess is that it isn't worth cashing out an IRA to pay it off. Also, the idea of paying off all of your debts is nice...but it takes a LOT of discipline to remain debt free after you pay everything off. And if you don't remain completely debt free and you're not able to save that $30k/yr like you're projecting, then really what's the point?
     
  21. JamesMike macrumors demi-god

    JamesMike

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    #21
    I agree getting sound professional advice is the wised move.
     
  22. nightcap965 macrumors 6502a

    nightcap965

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    #22
    I agree with the recommendations to get professional advice. I am not your financial advisor. However, I will note that the Unindicted Co-Conspirator and I retired last year. We retired quite early. Our retirement was made possible by the fact that we contributed the maximum amount to our 401K plans and never, ever touched them. That was money set aside for a nice old couple we hoped to know someday.

    Right at the moment we're having a market correction - they happen every now and then. Cashing in your fund now would be buying high and selling low.

    On the other hand, you can buy low by rolling the IRA into your current plan, especially if it offers a nice low-cost index fund. The future you will thank you.
     
  23. Gutwrench macrumors 65816

    Gutwrench

    Joined:
    Jan 2, 2011
    #23
    Op - if you cash out the plan administrator will withhold 20% tax and 10% penalty.

    You can avoid the penalty by divorcing and having her award the entire balance to you via a qualified QDRO.

    You will then have the option to:
    1) roll it over in your name
    2) cash it out with income tax withholdings, but without the 10% penalty
    3) #2 and skip out of town after dark and keep it all :cool:
     
  24. D.T. macrumors 603

    D.T.

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    #24
    My advice would be to follow this outstanding suggestion.

    Wait ...

    *ironic implosion*

    :D
     
  25. mobilehaathi macrumors G3

    mobilehaathi

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    #25
    Liquidate everything and buy penny stocks!
     

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